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Twelve years after Spectrum Health began as a hybrid of two Grand Rapids hospitals, the health care organization is in talks that have the potential to extend its reach to a large swath of the Lower Peninsula.

Pending health care reform at the national and state levels, anticipated changes in reimbursement and a drop in discretionary use of hospitals are combining to accelerate hospital consolidation, said Brian Peters, COO of the Michigan Health & Hospital Association.

“I expect that in the next 20 years here in Michigan, we’re going to see the consolidation trend continue … and perhaps even intensify in the next 20 years,” Peters said, noting that the state has gone from more than 200 independent hospitals to 144, many now part of a larger system, over the past two decades.

“Many here in Michigan are looking at the handwriting on the wall in terms of the new demands on providers, hospitals, physicians and others,” he said. Pressure to contain costs and boost quality and access simultaneously is increasing, he noted.

“That’s a major thrust right now that’s driving some of this consolidation, so that hospitals can share resources, can be more efficient, so that we share information about best practices, clinical protocols. There are a number of forces — looking at physician recruitment and retention, looking pooling resources to provide medical liability coverage — there is a long list of things that are contributing to this trend.”

For example, Sparrow Health System of Lansing recently acquired Ionia County Memorial Hospital, which it had been managing, by forgiving a $3 million loan.

Spectrum Health is in due diligence and negotiations with three health systems and already provides management at a fourth, all north of Grand Rapids. Those hospitals, in turn, have a variety of arrangements with even smaller hospitals and other health care providers.

The result could be a Spectrum Health that eventually includes a mixed bag of outstate acute care hospitals, home health organizations, long-term and skilled nursing facilities, doctors’ groups, ambulance services, clinics and even an outfit called “Ahh, the Spa at Tamarac.”

Last week, Spectrum and Munson Healthcare announced that they had signed a non-binding letter of intent and would launch due diligence, moving toward making the Traverse City nonprofit system part of the Spectrum Health System.

Munson Healthcare describes itself as “a not-for-profit network comprised of owned, jointly-owned, managed and affiliated entities.” Those include a dialysis center, an air ambulance service, mobile imaging, home health care, a supply organization, an ambulatory surgical center and seven hospitals.

Munson also owns a small percentage of Class B stock in Priority Health, the health insurer controlled by Spectrum Health.

Munson is affiliated with four other northern Michigan hospitals, which its statement notes, would not face any obligations due to an “agreement” between Munson and Spectrum. Two of those are Mercy Hospital Cadillac and Mercy Hospital Grayling, both owned by Catholic system Trinity Health, which also owns Saint Mary’s Health Care in Grand Rapids and Mercy Health Partners in Muskegon. Munson’s other affiliated hospitals are Otsego Memorial Hospital in Gaylord and West Shore Medical Center in Manistee.

“We have four affiliates we do not own or manage. We do their information technology, we recruit physicians on a regional basis. We work with them operationally and strategically,” Munson CEO Doug Deck explained.

Deck said last week that access to capital and more clout in recruiting physicians are two major reasons that Munson Healthcare is interested in joining Spectrum Health.

“The real nuts and bolts of what this is all about is for northern Michigan, it’s about access to physicians and access to capital in the long, long term,” Deck said.

Munson is strong financially and has about a 5 percent operating margin, Deck added.

“If the owned assets of Munson, which is the part that we’re talking about, is stronger than it is now into the future, then it will be good for all the related facilities who utilize it. It’s a pretty complex business, but it’s all really simple when you get down to what the important issues are.”

Spectrum Health President & CEO Rick Breon said uniting an array of outstate health systems could help to create “a level playing field” for West Michigan health care.

“I think it would give us strength in the political arena as well, especially on the west and northern sides of the state,” Breon said. “It’s no challenge to see you’re at a disadvantage when you have population centers in the southeast part of the state. How do you more equitably make sure that if there’s going to be Medicaid allocation, it’s done fairly; if there’s going to be other things in funding, done fairly, how is that done to make sure we have a level playing field for those kind of things. I think it does give you more leverage in the particular perspective.”

Consolidation could give Spectrum a stronger negotiating position with insurers, added Rick Murdock, executive director of the Michigan Association of Health Plans.

“When you have a larger provider entity, from a payer perspective it consolidates more power, more strength in terms of their negotiating position, to the degree that payers have to negotiate with providers on different contracts and arrangements,” Murdock said. “Whether or not that translates into increased cost, it depends. As health plans or different carriers seek to extend provider networks into the west side and northern Michigan, obviously they’ll be a force to reckon with.”

Breon said the due diligence process will sort through the possibilities for the nonprofit corporate connections between the health systems and their tentacles.

“The structure hasn’t been completely thought out,” Breon said. “That’s part of what due diligence will do. I don’t want to give impression this is a done deal.”

In addition to Munson, Spectrum Health is currently in talks with Gerber Memorial Health Services and Northern Michigan Regional Health System. The CEO of Spectrum’s Reed City Hospital also serves as CEO at Mecosta County Medical Center.

NMRHS owns the 243-bed hospital in Petoskey. Its partnership with the Mackinac Straits Hospital & Health Center in St. Ignace means it could impact patients at clinics in the Upper Peninsula and on Mackinac Island. NMRHS is also in negotiations regarding an affiliation with Cheboygan Memorial Hospital.

Gerber, which owns the 77-bed hospital in Fremont, has clinics in Grant and Hesperia, physician offices, a cancer center, rehabilitation services, Women’s Health Services, two personal fitness locations and Tamarac, The Center for Health and Well-Being, which is home to Ahh, the Spa.

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